INVESTING
INSIGHTS, ANALYSIS, NEWS & TOOLS
PRINT
EMAIL
DEL.ICIO.US
DIGG THIS
Investors are more bewildered than usual. One day they worry about whether the economy and corporate earnings will roll over. The next, they obsess over higher inflation and robust job numbers. Toss in uncertainty over rising interest rates and the proliferation of global flashpoints, and it's easy to see why everyone is just a bit on edge.
In Sugar Land, Tex., Monty Campbell is ratcheting down his portfolio's risk. Small-company stocks and emerging-markets funds scare Campbell, a sales manager for Sun Microsystems. So he's adding retirement money to Fidelity Contrafund, which focuses on large companies with above-average earnings growth. "Large-caps look incredibly cheap," says Campbell, 41. He also likes the prospects for Japan and developed economies in Europe, so he is placing more chips in Fidelity Diversified International (which, like Contrafund, is closed to new investors).
RELATED STORIES | |||
 |
Preparing for Rocky Times | ||
|
|
Hedge Funds That Work | ||
|
| Fund Watch column | ||
It's hard to fault Campbell's instincts. Market fundamentals shifted abruptly in May 2006, and we believe they're headed in his favor. For several years, many investors have chased more-speculative and volatile assets, such as small-company stocks, emerging-markets stocks and bonds, as well as gold and other commodities. But now, central banks around the world are signaling that the party's over. Leading the pack is the U.S. Federal Reserve, which has raised short-term interest rates 17 consecutive times. All of the sectors that performed heroically between 2002 and last May were hammered in the recent market correction. "Investors have gotten paid very well over the last couple of years to own lower-quality and higher-risk assets," says Scott Merritt, a strategist for JPMorgan Asset Management. "That play's over."
How should fund investors confront this risk-averse environment? Simple: Focus on quality. It makes sense to shift some money from small-company funds to large-company funds, especially those rich in dividend-payers. Investing globally makes more sense than ever, but we prefer funds that focus on developed markets rather than emerging markets.
In the fixed-income arena, the gap between Treasury-bond yields and those of emerging-markets and domestic high-yield bonds seems awfully thin. So you're better off with short- and medium-term high-grade bond funds. And with yields on virtually risk-free money-market funds starting to hit 5%, cash is beginning to look mighty attractive.
History lesson
The economic and stock-market recoveries of the past few years shed light on today's shifting ground. Typically, small-company stocks perform well in the early stages of a rebound because, among other things, it takes less capital to move these stocks. Early in this cycle "a tidal wave of money poured in," says Eileen Rominger, chief investment officer and portfolio manager for the US Value Team of Goldman Sachs Asset Management. "And a rising tide lifts all ships."
Rominger argues that investors failed to discriminate between mediocre and superior companies. In fact, Alan Skrainka, chief investment strategist at Edward Jones, notes a perverse investment relationship over the past few years: The higher the quality of a company, the poorer the performance of its stock; the lower the quality, the better the performance. As a result, the price-earnings ratio of small-company stocks relative to large-company issues is the greatest it's been in more than 20 years. "Small-company stocks look very, very expensive," says JPMorgan's Merritt.
Reprint Article
|
|
|
|
|
